Seeing the Forest Through the Seps

Home , Mobile web, Smartphone patent wars

COVER STORIES

Antitrust , Vol. 2 7, No. 3, Summer 2013. © 2013 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Seeing the Forest Through the SEPs

BY JOHN D. HARKRIDER

N THE MID-1970 S, THE SOVIET UNION forced the parties to the CPTN/Novell transaction to alter proposed an ostensibly balanced step towards nuclear the terms of their deal to incorporate several protections for disarmament: if the U.S. agreed to ban its Trident open source software, 6 but allowed the Rockstar consortium Ohio-class submarine, the USSR would ban its “anal - to bid for and ultimately acquire the Nortel portfolio. 7 ogous” Soviet submarine. 1 At first blush, this offer The antitrust agencies’ interest in the “smartphone wars” Iappeared to represent a reciprocal approach to reducing the accelerated only when Google, the main driving force behind superpowers’ nuclear capabilities related to submarine- Android, sought to acquire Motorola Mobility—and its size - launched ballistic missiles (SLBMs). able patent portfolio—in an effort to decrease patent imbal - Although many Americans protested against the building ance in the industry and thus deter further attacks on of the Trident submarine, the U.S. Government rejected this Android. The Agencies began to focus on the assertion of offer, and with good reason. At the time, the USSR already SEPs, in particular the alleged risk that suits brought by SEP possessed SLBMs that were more advanced than those in owners seeking injunctive relief would allow them to “hold- the Pentagon’s arsenal. Developing the Trident Ohio-class up” implementers. submarines was necessary in order for the U.S. to achieve The Agencies’ focus on SEP injunctions seemed odd. equivalent SLBM capabilities. The Kremlin’s proposal to After all, no injunction or exclusion order on SEPs has ever ban its “analogous” submarine would not have affected its been issued in the smartphone space in the U.S., and Motor - pre-existing SLBMs—it would have only prevented the U.S. ola did not dispute its obligation to license those patents on from catching up. Thus, what was presented as an even- FRAND terms. Indeed, Apple had refused to pay Motorola handed step towards disarmament actually would have tilt - Mobility anything for its significant portfolio after three years ed the battle field in favor of the USSR and arguably extend - of negotiation under a hypothetical threat of injunction, ed the arms race. which is hardly evidence of hold-up. During this time, Apple Something similar is happening in the current debate reportedly collected up to 80 percent of the profits in the regarding standard essential patents (SEPs). Over the last smartphone industry, evidence that the more significant con - several years, Microsoft and Apple have waged a patent war cern was that firms would hold-out from paying royalties, not against devices running the open source Android operating be held-up from making profits. 8 system, obtaining injunctions, 2 billion-dollar jury verdicts, 3 Moreover, the legal argument for barring even the poten - and billions of dollars in royalties. 4 Apple and Microsoft tial for injunctive relief was novel. As recently as 2 011, achieved those successes despite concerns about the general Microsoft argued to the FTC that FRAND commitments quality of the underlying patents and despite winning only a should not be understood to preclude claims for injunctive small fraction of the claims they filed. relief and that there is “little evidence that patent hold-up in Despite complaints from members of the open source the standards context is a real problem. ”9 Moreover, the community that certain proprietary-source firms had long Commission itself noted in its 2007 Rambus opinion that sown fear, uncertainty and doubt in an effort to limit the injunctive relief was and ought to be available with respect to adoption of open source products, 5 the antitrust regulators FRAND-encumbered SEPs. 10 largely stayed on the sidelines. That began to change when Microsoft and Apple’s endorsement of strict controls on Microsoft and Apple, joined by several other proprietary the availability of injunctive relief for SEPs changed after software firms threatened by open source competition, sought Google’s announced acquisition of MMI. Their proposed to expand their patent arsenals by acquiring thousands of ban on injunctions would (1) prevent Google from using patents from Novell and Nortel. The Department of Justice SEPs to defend itself and other open source distributors and partners from attack, while (2) permitting Microsoft, Apple, John D. Harkrider is a partner at Axinn, Veltrop & Harkrider, LL P, and was and their allies to use their larger portfolios of non-SEPs to co-counsel to Google in its acquisition of Motorola Mobility and counsel obtain injunctions against Android and other open source to Google in the SEP investigation by the FTC. Russell Steinthal, Eric devices. In effect, these companies ripped a page from the Barstad, and Soojin Nam provided invaluable assistance on this article. The views expressed herein are the author’s own and do not necessarily Soviet playbook, proposing what appeared to be a neutral rule reflect those of any client. towards peace, but the effect of which would be to allow them to continue the war on more favorable terms.

22 · ANTITRUST The Federal Trade Commission took a more nuanced those general principles, however, there is frequently dis - approach to the issue. After an in-depth review of the facts agreement—both among SSO members and with non-mem - and theory, the Commission adopted a balanced approach bers—as to how the requirement of FRAND licensing should that addressed the potential risk of willing licensees of SEPs be interpreted and enforced. 12 being enjoined, without completely limiting the effectiveness At one extreme, “innovator” companies with significant of SEPs as deterrents against unwilling licensees and patent portfolios of SEPs (which are generally the result of signifi - aggressors. 11 In short, the FTC endorsed a solution that takes cant R&D investments) tend to advocate for robust inter - into account the dual harms of hold-up and hold-out. In pretations both of what a “reasonable” royalty can be and of doing so, the FTC preserved incentives for firms to contin - SEP holders’ right to enforce their patents against parties ue to invest in standard setting and the many procompetitive that are unwilling to agree to a license agreement and pay a benefits that standard-setting organizations (SSOs) produce. reasonable royalty. At the other end of the spectrum, firms that do not own SEPs, but rather are pure “implementers” of The Role and Incentive Structures of the standard, tend to argue that “fair and reasonable royalties” Standard-Setting Organizations should be lower and that, by promising to license on FRAND By encouraging interoperability, SSOs produce benefits that terms, SEP holders agreed to limit the remedies they would redound to innovators, implementers, and consumers. Many seek for alleged infringement of their essential patents (for of the most significant accomplishments in the telecommu - example, by foregoing injunctive relief or enhanced dam - nications field are attributable to the work of major SSOs, ages). such as the European Telecommunications Standards Insti - SSOs have historically taken a middle ground between tute (ETSI), which promulgated the GSM, 3G, and 4G stan - these two positions, refusing to specify the appropriate dards (and which holds the trademark on “LTE” as a result). FRAND rate and refusing to adopt a categorical rule for or The fact that SSOs like ETSI are diverse groups of firms against injunctions. Such a balanced approach is in the SSOs’ that compete both in innovation and in their implementation self-interest, which in turn suggests it is welfare enhancing. of finished standards is crucial both to their technical and The reason is simple: SSOs represent the interests of both economic success. types of companies and have an interest in adopting a mid - Most of the work of SSOs is done by committees and dle ground that maximizes participation in both developing working groups that are charged with drafting a new standard and deploying their standards. Indeed, many SSO members (or portion of a standard). Such groups bring together rep - are themselves both innovators and implementers, but often resentatives of the key stakeholders to consider the relevant in different proportions for various standards. technical questions and, ultimately, determine the content of Consider, for example, what would happen if an SSO the standard. Significantly, many of the proposals considered were to adopt a uniform rule that royalties must always be by an SSO and its working groups (particularly in the tele - charged against the cost of a component (e.g., a $30 chipset) communications industry) might be patented by one of the rather than the price of the end device (e.g., a $300 handset). SSO members. Moreover, a firm’s representative on a com - Such a rule would—if royalty rates were held constant— mittee might have an incentive to incorporate her firm’s reduce total royalties by a factor of ten. Innovator firms there - patented technology into a proposed standard as a way of fore would be faced with one of several equally unappealing increasing future licensing revenue (particularly once the choices: (1) reduce their participation in SSOs generally, and industry becomes locked into the standard). As a result, most thereby forgo the ability to shape the next generation of SSOs require any firm participating in a standards-develop - industry standards; (2) choose to participate in an alternative ment effort to both disclose whether it owns potentially SSO that did not as strictly restrict the royalties they could essential patents for a particular proposal and agree, in charge; or (3) reduce their overall investment in R&D to advance, to license any of its patents essential to the ulti - account for the lower expected royalty return. None of these mately adopted standard on fair, reasonable, and non-dis - choices is a good outcome either for the firms concerned or criminatory (FRAND) terms. the SSO (including its implementer members), particularly FRAND licensing requirements balance two important since the firms most affected (and thus most likely to change interests of an SSO. The first is to maximize the technical their behavior) are likely to be among the most significant quality of the standard by providing an incentive for inno - contributors to the standard-setting process and the collective vators to participate in the SSO (and contribute their know- R&D effort that serves as its foundation. The ultimate out - how and R&D efforts to the collective effort). The second is come, therefore, is likely to be lower quality standards, less to maximize adoption of the standard (and thus the value of innovation, and less consumer demand for new products. the standard to the entire industry) by ensuring that any Conversely, imagine what would happen if the same SSO interested firm can obtain the patent licenses necessary to were to adopt a rule permitting (or even encouraging) injunc - implement the standard on reasonable terms, without being tive relief for any infringement, even by a firm that is entire - subject to attempts by SEP holders to engage in “hold-up” ly willing to take a license on FRAND terms. Such a rule and monopolize the consumer value of the standard. Beyond might permit large SEP holders to hold-up other imple -

SUMMER 2013 · 23 COVER STORIES

menters with few or no SEPs and demand supra-FRAND issue. This claim has a chance to succeed because courts have rates. As a result, implementers undoubtedly would reduce held that the implementer is a third-party beneficiary of the their investment in products implementing standards or find SEP holder’s promise to license on FRAND terms. 15 Because another SSO that had a different rule against injunctions. the patentee’s FRAND licensing obligation typically attach - This would slow adoption of the SSO’s standards, reducing es to all of its patents that are essential to a particular standard both the positive network externalities available to all par - (which are generally licensed on a standard-by-standard ticipants and the royalty revenues available to SEP holders. basis), the implementer can generally bring a single breach of (Notably, the latter phenomenon would affect even SEP contract action to resolve a dispute that might involve hun - holders which did not themselves attempt to “hold-up” dreds of SEPs. Microsoft, for example, used that approach to implementers, since overall demand would nonetheless obtain a FRAND rate determination as to Motorola’s H.264 decline.) and 80 2.1 1 SEPs in a breach of contract action in the Western SSOs therefore adopt a balanced approach (including fre - District of Washington. 16 quently declining to provide specific guidance on the precise Patentees, however, lack an equivalent remedy, because meaning of “FRAND” and instead allowing the parties to an implementer has no obligation (contractual or otherwise) develop meaning through bilateral negotiations). Going too to pay the FRAND rate unless it is actually infringing a valid far in either direction would potentially reduce participation patent. The patentee’s only way to compel the implementer in their SSO as well as standard setting generally. to take a license or to otherwise receive compensation is to lit - More importantly, the SSO members themselves have an igate the underlying infringement claims. interest in a balanced approach because they collectively rep - Yet no court will hear a patent infringement suit on more resent the interest of an industry seeking to maximize output. than a handful of patents at a time. A holder of a significant That is, they collectively represent producers (SEP holders) portfolio of SEPs is therefore forced to resort entirely to dam - and consumers (device manufacturers). Indeed, most of the ages judgments as a means of obtaining compensation for the longstanding members of SSOs are themselves both SEP use of its valuable intellectual property. This, in turn, means holders and implementers—for example, those who make that SEP holders would need to bring potentially hundreds devices may have SEPs, but they may also have to pay oth - of individual patent infringement suits, proving validity, ers for SEPs. That was undoubtedly one reason why a recent infringement, and damages as to each patent seriatim to even ETSI working group rejected the “extreme” positions that come close to approximating the reasonable royalty that a injunctions should always be available, even against willing willing licensee should have paid from the outset (and even licensees, or that they should be categorically barred. 13 then, it is not clear that a court would require the now- SSO participants are thus analogous to individuals behind adjudged infringer to pay the same royalty going forward, cre - a Rawlsian veil of ignorance. 14 Individuals who are not aware ating the risk of yet more litigation). In such a scenario, the of what status they will have in life will set fair and just rules DOJ has recognized that potential licensees may have little that are evenly applied to all individuals or situations. Firms incentive to negotiate portfolio-wide SEP licenses. 17 that both invest in R&D—and thus could come to own That is where the availability of injunctive relief can be a patents subject to FRAND licensing obligations—and expect useful and efficient tool to compel a recalcitrant infringer to to implement the eventual standard, are not aware if they will engage in good-faith license negotiations. Recognizing that as be held up by SEP holders or will instead find SEP imple - an option would not necessarily subject implementers to menters holding out from paying for use of their SEPs. Given hold-up, since they would always retain the right to seek a that condition of uncertainty, they are likely to adopt rules FRAND license and to seek judicial relief if they believe the that balance both concerns. licensor is breaching its commitment; the licensor’s willing - ness to make a fair and reasonable offer could even be deemed Asymmetry of Remedies a precondition to obtaining the equitable remedy of injunc - Inherent in FRAND licensing requirements is the expecta - tive relief on a FRAND-encumbered patent. 18 The key point tion that the parties will negotiate in good faith to determine is that a categorical elimination of injunctive relief as even a appropriate royalties. If those negotiations fail to lead to an potential remedy greatly enhances the risk of “hold-out.” agreement, however, the two parties have highly asymmetric Indeed, because each patent infringement suit could take litigation options available to them to resolve the impasse. several years, and because the likely worst case scenario is that An implementer who is willing to license the SEPs on they would have to pay some fraction of the FRAND royal - FRAND terms, but believes that the patent holder is insist - ty for the patents that they infringe upon, there is little incen - ing on unreasonable or discriminatory terms, can generally tive for the implementer to negotiate a FRAND license in bring a state law breach of contract action to determine such a system. That is especially true when one considers that whether the SEP holder has, in fact, complied with its there is little possibility that a court would find that every FRAND licensing obligation. If a breach is found, the imple - patent in a portfolio was infringed and valid, meaning an menter can arguably seek relief in the form of a declaration implementer is always better off holding out instead of nego - of an appropriate FRAND royalty rate for the standards at tiating a FRAND license. That appears to have been Apple’s

24 · ANTITRUST strategy in its failed attempt to convince a Wisconsin district OEMs to enter the smartphone space, enabling as many court to require Motorola to offer a FRAND royalty set by the consumers as possible to access the Internet on low-priced court for its cellular essential patents, but only as a precursor mobile devices. Google’s strategy posed a threat to both to further negotiation between the parties—despite the fact Micro soft and Apple because it lowered the prices and that Apple had consistently failed to pay any royalties over the profits that they could earn on smartphones. In particular, many prior years of negotiation. 19 Android posed a significant threat to Microsoft’s desktop operating system monopoly, as consumers increasingly sub - The Evolution of SEP Licensing Practices stituted from desktops to mobile devices. Although patents play an important role in the telecommu - Because Google, Apple, and Microsoft were not telecom - nications sector, prior to the entry of Apple and Microsoft, munications firms, however, none of them had significant there had been very little patent litigation between industry portfolios of network protocol SEPs and therefore they could participants. Instead, there had been a long history of cross- not enter into a broad SEP cross license as incumbents had licensing between holders of large portfolios of SEPs. traditionally done. Because most telecommunication firms were both licen - Microsoft and Apple, however, had significant portfolios sors and licensees at the same time, they each had interests in of non-SEPs. In fact, at the time of the announcement of setting royalty rates that were, in fact, fair and reasonable. If Google’s acquisition of Motorola Mobility, Microsoft had they set a rate on their 3G patents that was too high, that rate approximately 18,000 patents and Apple had approximately would become precedent for a firm that was trying to charge 4,500 patents. These firms, however, had invested very little them a high rate. If they argued for too low a rate, that rate in network protocol technologies. For example, by the would become precedent for those who wanted to pay them announcement of the Motorola Mobility Acquisition, Apple that low rate. had declared only 23 U.S. patents as essential to ETSI and Moreover, given the large number of patents that poten - Microsoft had declared only one. 23 tially read on a single device, 20 telecommunication firms Google had an even more significant problem—it lacked invariably licensed their entire portfolio of patents that read a significant portfolio of both SEPs and non-SEPs. This was on a particular standard as opposed to patent-by-patent not because Google had failed to make significant investment licensing. This is because a portfolio license gives the licens - in R&D. Indeed, Google spent more on R&D as a percent - ee freedom to operate within a given field without concern age of sales than Apple. 24 Instead, it was due to the fact that that they only licensed some but not all of the licensor’s Google was a young company and therefore did not have suf - patents that read upon a particular standard. 21 ficient time to accumulate patents and, as a firm with strong As a result of this dynamic, most telecommunication firms connections to the open source community, had historically charge very similar prices for their portfolio of SEPs. been skeptical of the merits of patenting software. Specifically, Samsung, Nokia, Ericsson, Alcatel-Lucent, All three of these firms adopted very different strategies to Motorola, and Qualcomm all charge between 2 and 4 percent address their lack of network protocol SEPs. Apple sought of the end-device for their portfolio of SEPs. 22 Further, most injunctions against Android OEMs, such as Motorola, of these firms do not “royalty stack,” which means that if a Samsung, and HTC, for allegedly infringing design patents, firm enters into a license for GSM or UMTS at 2 percent, such as those covering the rounded corner of the iPhon e25 that firm generally would not also pay an additional royalty and software patents, such as those covering “swipe to to the same patentee for implementing additional standards unlock. ”26 Apple—when it chose to license its patents— in the same devices. Where firms had balanced portfolios, it sought up to 10 percent of the base price of Android smart - was possible that they would cross-license each other at low phones as royalties on just a handful of its patents. 27 royalty rates or even at zero royalty. In contrast, Apple refused to pay anything to SEP holders Apple, Microsoft, and Google Enter the Smart phone like Motorola. Instead, Apple exploited the asymmetry in Space. In the mid-2000s, three firms that previously had lit - FRAND remedies. After more than three years of fruitless tle history in the telecommunications industry entered the negotiations, Motorola Mobility sued Apple for infringe - smartphone space: Apple, with its iPhone; Google, with ment. Apple countersued, alleging, inter alia, breach of con - Android; and Microsoft, with Windows Mobile. These firms tract and claiming that it had no obligation to pay the all had different business models and all had different patent FRAND rate set by the court without Motorola bringing holdings, which led to very different strategies. hundreds of individual patent infringement actions. 28 Apple wanted to sell a high-end device and did not want For its part, Microsoft also sought injunctions against to license either its software or design patents to competitors. Android OEMs using non-SEP software patents. Unlike Microsoft wanted to license its operating system to OEMs Apple, however, Microsoft was willing to enter into patent and was willing to license its patents, provided it could earn cross-licenses, though at highly disadvantageous terms. significant revenues from them. Specifically, Microsoft reportedly required Android OEMs to Google had a very different strategy. It wanted to broad - pay license fees of $5 to $15 per device (amounting to 5 to ly distribute its free Android operating system to encourage 10 percent of the base price of many devices), and in some

SUMMER 2013 · 25 COVER STORIES

cases, to agree to sell smartphones using Windows as well. 29 That strategy reportedly has earned Microsoft more than If hold-up were prevalent in the industry, one would $1 billion in annual royalties from Android OEMs. 30 Whatever the consumer welfare implications of those expect to see the profits of SEP holders significantly strategies, there is little question that the patent laws protect each company’s right to assert its patents, absent evidence outstrip those of SEP implementers. Yet, the opposite that they were obtained through fraud or inequitable conduct or that their assertion would extend the patent monopoly is true. beyond its Congressionally-conferred scope. But at the same time, defensive assertions and negotiated settlements are also resolve the patent claims against them before they reached the part of the patent law equilibrium, and restrictions on the stage of injunctions or massive damage verdicts. ability to bring certain types of patent claims can have far- reaching implications for the patent system and for compe - The DOJ Responds tition. Given the well-recognized problems with patents in high Hold-Up v. Hold-Out. There is no question that hold- technology generally and in the smartphone space specifically, up and hold-out are valid concerns for policy makers charged it is unsurprising that the antitrust agencies entered the fray. with promoting both innovation and downstream competi - These issues were brought to the DOJ’s attention in its review tion. If SEP holders are able to use injunctions against will - of the CPTN transaction, in which Apple, Microsoft, Oracle, ing licensees, there is a risk that they can force firms to pay and EMC, four firms that had faced open source challenges supra-FRAND rates because the alternative—being enjoined to their proprietary software-based market power, sought to from the market—can make them lose the entire profit purchase the patent portfolio of Novell, one of the leading stream they expect to earn from the excluded device. As a providers of open source software. result, firms may not invest in devices implementing the Novell previously had little incentive to assert its patents standard. Conversely, if firms are free to refuse to pay for their against open source competitors because doing so would use of SEPs without any risk of injunctions or damages (at undermine the market acceptance of open source, and could least within a reasonable period), that may lead to underin - also harm its reputation in the open source community and vestment in standards development and related innovation. alienate key contributors, both of which were central to its What’s more, it may increase the comparative value of low- business. 33 For Apple, Microsoft, Oracle and EMC, by con - quality software and design patents, which do not have trast, open source software functioned as a rival to their respec - FRAND limitations. tive proprietary products. Hence, those firms potentially had In the presence of competing hypotheses, empirical evi - greater incentives to assert the acquired patents aggressively. As dence can help determine which hypothesis is correct. If the DOJ noted, “as originally proposed, the deal would jeop - hold-up were prevalent in the industry, one would expect to ardize the ability of open source software, such as Linux, to see the profits of SEP holders significantly outstrip those of continue to innovate and compete in the development and SEP implementers. Yet, the opposite is true. Apple, which has distribution of server, desktop, and mobile operating systems, very few network protocol SEPs, earns up to 80 percent of the middleware, and virtualization products. ”34 As a result of the profits in the smartphone space. 31 In contrast, Nortel, one of DOJ’s investigation, the parties modified the transaction. the largest holders of SEPs in the world, declared bankrupt - Microsoft agreed to sell all of its acquired patents back to cy, and Motorola Mobility and Nokia, two of the largest Attachmate (the successor to Novell’s open source businesses) holders of SEPs, were both losing money for years. 32 and EMC agreed not to acquire certain patents related to vir - Moreover, the largest holders of non-SEPs, Apple and tualization (a market in which it had significant market Microsoft, have been able to obtain injunctions and billion- power) that read on its dominant virtualization product. All dollar damage awards against SEP holders, demanding and of the acquirers, meanwhile, agreed to take the patents subject obtaining damages that are far in excess of the rates they to the license Novell had previously granted to the Open contend are supra-FRAND. While patent holders generally Invention Network (OIN), which grants a royalty-free cross- have no obligation to license their patents, it seems odd to license to developers and users of specified forms of Linux sys - argue that a 10 percent royalty is an appropriate measure of tems who are willing to grant other participants similar rights damages for a design feature, such as swipe to unlock or the under their patents. 35 rounded corners of an iPhone, while arguing that a 2.25 Shortly thereafter, Apple, Microsoft, RIM, and Oracle percent royalty for essential telecommunications functional - moved to acquire approximately 6,000 patents from Nortel ities that drive consumer demand for smartphones (e.g., the through the Rockstar consortium, after outbidding Google’s ability to transmit videos, music, and large documents wire - stalking-horse bid. Significantly, Nortel was an important lessly) is outrageously extortive. Likewise, if SEP holders had telecommunication company and had a number of SEPs; the power to hold-up firms like Apple for licenses to their although inconsistent with the hold-up hypothesis, it had SEPs, one would have expected them to use that power to failed to generate a significant amount of royalties from these

26 · ANTITRUST patents. Although the DOJ reviewed the acquisition, there ed that Google would not have a greater incentive than was no formal remedy. Instead, Apple and Microsoft made a Motorola Mobility to use these patents aggressively against series of commitments with regard to their use of the acquired Microsoft and Apple and cleared the transaction. 43 SEPs. 36 Microsoft, for example, promised not to seek injunctions The FTC Acts on the acquired SEPs and agreed that this promise would After the Motorola Mobility transaction closed, the FTC travel with any SEPs that it transferred to third parties. 37 opened an investigation into whether Google’s use of SEPs to Microsoft’s relief left open the possibility that it would seek seek injunctions violated its FRAND commitments to ETSI, injunctions on non-SEPs even if they are subject to a RAND the Institute of Electrical and Electronics Engineers (IEEE), obligation. Nor did Microsoft promise that it would not and the International Telecommunication Union (ITU) involve itself in transactions that transfer SEPs to trolls. This (three major SSOs). 44 latter gap is significant because in 2012, Nokia, after receiv - In some respects, the FTC’s focus on FRAND commit - ing $1 billion from Microsoft, transferred approximately ments was not surprising. The FTC had a long history of 1,200 SEPs to a troll, which, in turn, shares royalties with enforcement action against holders of FRAND-encumbered Microsoft and Nokia. 38 patents whose unfair or deceptive conduct had willfully cre - Apple, for its part, wrote to ETSI committing that it ated monopoly power. For example, in Rambus , the FTC would not seek injunctions on SEPs, provided that the coun - concluded that Rambus’s misrepresentation to JEDEC (an terparty adopted Apple’s favored royalty base—a “basic com - SSO in which it participated) that Rambus did not have munications device. ”39 This proposal would have the effect patents reading on the DRAM standard, when it actually did, of reducing the resulting royalty by a factor of up to ten, violated Section 2 of the Sherman Act. 45 The Commission when compared with the prevailing industry norm of charg - reached a similar conclusion in the Unocal case, in which ing royalties on the net selling price of the actual licensed Unocal misrepresented its patent holdings to the State of device. 40 In other words, Apple promised it would not seek California, leading a state agency to impose a regulatory stan - injunctions on SEPs provided that the other party agreed to dard that made Unocal’s patents essential and thereby gave charge no more than what Apple was willing to pay. This, of the company otherwise unavailable market power. 46 Despite course, is no different than a firm saying that it will not seek the absence of a traditional SSO, the Commission unani - an injunction if the counterparty agrees to pay exactly what mously concluded that the alleged conduct violated Section it demands. 2 and Unocal agreed to settle the proceeding, after consider - At the same time, the DOJ was also investigating Google’s able pre-trial proceedings, through a consent order. 47 acquisition of Motorola Mobility. Like Nortel, Motorola The Motorola case was different, however, because there Mobility had a significant portfolio of SEPs. It was also was no allegation that Motorola had failed to disclose its rel - actively engaged in litigation with Microsoft and Apple before evant patent holdings to the SSOs. 48 Nor had Motorola it was acquired by Google. As the European Commission rec - promised not to seek injunctions and then breached that ognized, Google acquired these patents so that it would be promise. In fact, as the district court found, ETSI rules did able to defend itself against continued attacks by Microsoft, not prohibit firms from seeking injunctions on their SEPs. 49 Apple, and other proprietary source firms. 41 Instead, the FTC argued that it was a breach of Section 5 For a number of reasons, Google did not have a greater in- for a firm to seek an injunction on a valid and enforceable centive than Motorola Mobility to assert the acquired patents. patent even where there was no misrepresentation to an SSO Motorola Mobility itself had an incentive to assert these or the public at large and even when the relevant SSO rules patents and was already involved in litigation with Microsoft did not prohibit injunctions. 50 In short, the FTC used and Apple. Further, Google had a strong disincentive against Section 5 to rewrite the SSO rules to include a prohibition using the acquired patents aggressively against other members on injunctive relief that the SSOs and their members had not of the Android ecosystem, such as Samsung or HTC. More - themselves adopted. over, Google had far greater downside in continuing a patent Whatever the merits of the FTC’s Section 5 theory, 51 the war that raised prices and reduced output as it, unlike Micro- FTC’s ultimate resolution rewrote SSO rules in a balanced soft, Apple, and even Motorola, had an interest in max imiz - way. The resulting consent order protects against hold-up by ing smartphone penetration—and the use its mobile web requiring Google and Motorola, as a precondition to seeking services—regardless of device manufacturer. injunctive relief on any FRAND-encumbered SEPs, to pro - Further, Google, like Microsoft and Apple, made several vide a prospective licensee with both an offer to license the promises to SSOs that helped address some of the DOJ’s con - relevant SEPs and an opportunity to submit the reasonable - cerns. 42 Specifically, Google promised that it would not ness of their requested license terms to binding, neutral arbi - increase the rate it charged for SEPs beyond Motorola’s pub - tration. 52 lished 2.25 percent of the end device price for the acquired Conversely, the order protects against hold-out by per - patents. Google also promised that it would not seek injunc - mitting Motorola and Google to seek any relief otherwise tions against willing licensees. In the end, the DOJ conclud - permitted by law—including injunctive relief—against a

SUMMER 2013 · 27 COVER STORIES

firm that, notwithstanding those offers, declines to enter into oneself that draws the attention and the punishment, whether a license or to be bound by the result of binding arbitration in the schoolyard or in the real world. Thankfully, instead of (or, in certain circumstances, a court’s determination of a punishing one side or the other, the FTC improved the rules FRAND royalty rate). 53 While it remains to be seen whether of the playground .Ⅵ the FTC will impose similar restrictions on other firms, the consent order provides a model for both SEP holders that want to enforce their essential patent rights and for SSOs looking to modify their own patent policies to more specifi - 1 Stanley H. Kober, Soviet Political Reponses to Trident and TLAM-N , Center for cally balance hold-up and hold-out. Naval Analyses Research Memorandum 87-7 (Dec. 1986), available at http://www.cna.org/sites/default/files/research/2787000700.pdf. The author would like to credit Susan Creighton for this historical analogy. Conclusion 2 See, e.g., Int’l Trade Comm’n, In re Certain Personal Data and Mobile Com - Some progress has been made in the smartphone patent wars. munications Devices and Related Software, Inv. No. 337-T A-710 (Dec. 19, The FTC has made it clear that firms will not be able to seek 2011) (Notice of the Commission’s Final Determination Finding a Vio lation of Section 337, Issuance of a Limited Exclusion Order, Termination of injunctions on SEPs against willing licensees. That is not, Investigation). however, a panacea. 3 See, e.g. , Nick Wingfield, Jury Awards $1 Billion to Apple in Samsung Patent The FTC’s Motorola analysis appears, on its face, to allow Case , N.Y. T IMES (Aug. 25, 2012), available at http://www.nytimes.com/ firms to continue to seek injunctive relief even against will - 2012/08/25/technology/jury-reaches-decision-in-apple-samsung-patenting licensees of FRAND-encumbered patents that were devel - trial.html?_r=0. 4 oped outside of the standard setting context. To that extent, See, e.g. , Steven D. Jones, Android Licensing Pacts Ring Up Microsoft’s Phone Revenue , DOW JONES BUSINESS NEWS (Apr. 26, 2013), http:// the Commission’s Motorola analysis appears to contract the www.nasdaq.com/article/android-licensing-pacts-ring-up-microsofts-phone- scope of its earlier Unocal analysis and may inadvertently revenue-20130426-00607; Trefis Team, Android Could Be a Billion-Dollar undermine the enforceability of statements by firms outside Business, for Microsoft , FORBES (July 11, 2011), available at http://www. forbes.com/sites/greatspeculations/2011/07/11/android-could-be-a- of the standard-setting context that they will license their pro - billion-dollar-business-formicrosoft; How Android Could Generate Microsoft’s prietary technology on FRAND terms. Next Billion Dollars , INT ’L BUS . T IMES (July 18, 2011), available at http:// Moreover, the continued transfer of patents (including www.ibtimes.com/how-android-could-generate-microsofts-next-billion-dollars- 299701; Ryan Kim, Can Android Be Microsoft’s Next $1 Billion Business? , SEPs) to patent assertion entities—which are immune to GIGA OM (July 6, 2011), http://gigaom.com/2011/07/06/can-android-be- countersuit and therefore are more likely to use these patents microsofts-next-1-billion-business /. aggressively rather than to negotiate broad cross-licenses— 5 See, e.g. , Ryan Paul, Linux Foundation to Microsoft: Stop Secretly Attacking makes a peaceful resolution of the current patent wars unlike - Linux , ARS TECHNICA (Sep. 10, 2009), http://arstechnica.com/information- technology/2009/09/linux-foundation-to-microsoft-stop-secretly-attacking- ly any time soon. linux/; Dr. Roy Schestowitz, Microsoft Is Still Attacking Free/Open Source Some of these problems may be solved by antitrust author - Software with Security FUD , TECH RIGHTS (Feb. 17, 2010), http://techrights. ities. For example, the antitrust agencies could institute rules org/2010/02/17/microsoft-on-many-eyeballs /. comparable to those established in Motorola to protect willing 6 See Press Release, U.S. Dep’t of Justice, CPTN Holding LLC and Novell Inc. licensees of all FRAND-encumbered patents, even if stan - Change Deal in Order to Address Department of Justice’s Open Source Concerns (Apr. 20, 2011), available at http://www.justice.gov/atr/public/ dardized outside a formal SSO context. Similarly, the antitrust press_releases/2011/270086.htm. agencies could examine whether dominant firms that pay 7 See U.S. Dep’t of Justice, Statement of the Department of Justice’s others to sell their patents to trolls are engaging in privateer - Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s ing that raises rivals’ costs and maintains market power. Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd. (Feb. 13, Specific attention is warranted where the sale is designed to 2012), available at http://www.justice.gov/opa/pr/2012/February/12-at- evade a publically announced royalty cap covering those SEPs. 210.html. Some of these problems, however, will need to be resolved 8 Zach Epstein, Apple Claimed a Staggering 80% of Mobile Profit in Q4 , by Congress. For example, changing the rules that have per - BGR (Feb. 7, 2012), http://www.bgr.com/2012/02/07/apple-claimed-a- mitted patents on frivolous design and software claims may staggering-80-of-mobile-profit-in-q4/. 9 See Microsoft’s Comment to the FTC for the Patent Standards Workshop 13, reduce the ability of firms to use these non-SEPs to exclude 16 (June 14, 2011), available at http://www.ftc.gov/os/comments/patent rivals and raise prices to consumers. Similarly, allowing fee standardsworkshop/00009-60523.pdf. shifting may reduce the incentives of trolls to extort settle - 10 Opinion of the Commission on Respondent’s and Complaint Counsel’s ments by bringing infringement claims on weak patents. Petitions for Reconsideration of the Final Order at 5, In re Rambus Inc. (Apr. 27, 2007) (recognizing that even if Rambus had made a FRAND commit - What is clear, however, is that the patent wars were never ment as required by JEDEC’s rules, “Rambus would have been able to about SEPs, the competitive effects of which have always seek injunctions against those who infringed without seeking licenses, and been muted by well-recognized FRAND licensing norms. to collect compensatory damages, and possibly even treble damages Instead, it was about patent aggression by dominant incum - against willful infringers”). bent software firms that were threatened by new competition 11 See Decision and Order, In re Motorola Mobility (Jan. 3, 2013), available at http://ftc.gov/os/caselist/1210120/130103googlemotorolado.pdf. (in this case from open source Android), with SEPs drawn 12 Where there is less need for royalties to incentivize investment in research into play solely as a defensive measure by the targets of that and development, some SSOs have chosen to forgo royalties altogether and aggression. But unfortunately, it is often the effort to defend require participants to license their SEPs on royalty-free terms. While such

28 · ANTITRUST royalty-free licensing requirements are, for example, common for Internet 30 See supra note 4 (articles cited). standards, they are rare in the mobile telecommunications industry. 31 See Epstein, supra note 8. 13 See Maissa Bahsoun, Status of Discussions: Overview of the Possible 32 See, e.g. , Hugo Miller, Motorola Mobility Drops as Profit Forecast Trails Scenarios, Associated Historical Information and Wording Proposals Where Estimates , BLOOMBERG (July 29, 2011), http://www.bloomberg.com/ Appropriate , ETSI/IPR (12) 12_002, at 14 (Oct. 17, 2012). news/2011-07-28/motorola-mobility-s-forecast-misses-estimates-amid- 14 See JOHN RAWLS , A T HEORY OF JUSTICE (Harvard Univ. Press 1999) (1971). rising-competition.html; Tarmo Virki, Nokia Profits Dive as New Phones Slow 15 See, e.g. , Apple, Inc. v. Motorola Mobility, Inc., No. 11 -cv- 00178 (W.D. Wis. to Take Off , REUTERS (Jan. 26, 2012), available at http://www.reuters.com/ Aug. 10, 2012) (Opinion and Order) (finding that as a potential user of the article/2012/01/26/us-nokia-idUSTRE80P00820120126; Nortel Sales standards at issue, Apple is a third party beneficiary of the agreements Decline As Customers Cut Spending , REUTERS (Mar. 12, 2010), available at between Motorola and IEEE and Motorola and ETSI); Microsoft Corp. v. http://www.reuters.com/article/2010/03/13/us-nortel-results-idUSTRE Motorola Inc., No. 1 0- cv- 01823 (W.D. Wash. Jun. 6, 2012) (Order) (sum - 62C05I20100313. marizing the previous findings by the court that “as a member of the IEEE 33 See Martin LaMonica, Novell Lines Up Behind Open Source , ZDN ET (Apr. 16, and the ITU and as a prospective user of both the H.264 Standard and the 2003), available at http://www.zdnet.com/news/novell-lines-up-behind- 802.11 Standard, Microsoft is a third-party beneficiary of those contracts”). open-source/128766; Sean Michael Kerner, Novell’s Open Source Rex Talks 16 See Microsoft Corp. v. Motorola, Inc., No. 2:1 0- cv- 01823 (W.D. Wash. Linux , INTERNET NEWS (Feb. 26, 2009), available at http://www.internet - 2010). news.com/dev-news/article.php/3806886/Novells+Open+Source+ Rex+Talks+Linux.htm. 17 See U.S. Dep’t of Justice & U.S. Patent & Trademark Office, Policy Statement on Remedies for Standards-Essential Patents Subject to 34 Press release, supra note 6. Voluntary FRAND Commitments (Jan. 8, 2013) (“We recognize that the risk 35 Id. of a refusal to license . . . increases where the putative licensee believes 36 See id. ; Microsoft, Microsoft’s Support for Industry Standards (Feb. 8, its worst-case outcome after litigation is to pay the same amount it would 2012), http://www.microsoft.com/en-us/legal/intellectualproperty/ have paid earlier for a license.”), available at http://www.justice.gov/ IPLicensing/ip2.aspx; Letter from Bruce H. Watrous, Jr., VP and Chief IP atr/public/guidelines/290994.pdf. Counsel, Apple, Inc. to Luis Jorge Romero Saro, ETSI Director-General (Nov. 18 For a general discussion of the role of injunctive relief in the context of 11, 2011), available at http://blog.ksnh.eu/de/wp-content/uploads/2012/ FRAND-encumbered patents, see James Ratliff & Daniel L. Rubinfeld, The Use 02/80899178-11-11-11-Apple-Letter-to-ETSI-on-FRAND.pdf. and Threat of Injunctions in the RAND Context , 9 J. C OMPETITION L. & E CON . 37 Id. 1 (2013). 38 See Alastair Sharp, MOSAID Sees Rescue In Its Nokia-Microsoft Deal , REUTERS 19 See Apple Inc. v. Motorola Inc., No. 11-cv-00178 (W.D. Wis. Nov. 8, 2012) (Sep. 1, 2011), available at http://www.reuters.com/article/2011/09/01/ (Opinion and Order) (Crabb, J., dismissing Apple’s FRAND rate-setting action us-mosaid-idUSTRE7803O920110901. because Apple stated “that it would be willing to pay a rate of no more than 39 $ 1 for each Apple device going forward, while it retained the right to appeal Id. any award higher than $1, as well as to refuse any such rate and proceed 40 Id. to further infringement litigation”). 41 No. COMP/M.638––Google/Motorola Mobility, Commission Decision of 20 See Mark A. Lemley, Ignoring Patents , 2008 MICH . S T. L. R EV . 19, 1 9–20 13/02/2012 Declaring a Concentration to Be Compatible with the Common (“[T]elecommunications and software companies” . . . . “must aggregate Market (“[T]he documents on the file show clearly that Google’s rationale hundreds or thousands of different components to make an integrated for the transaction is to create ‘patent balance.’”), available at http:// product. Each of those components may be patented, some by many dif - eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32012M6381:EN: ferent people.”). HTML. 21 It is, of course, true that some of the patents in the portfolio are either 42 See, e.g. , Letter from Allen Lo, Deputy General Counsel, Google, Inc. to invalid or not infringed, over a given size of portfolio. However, it is virtual - Gordon Day, President, IEEE (Feb. 8, 2012), available at http://static.google ly impossible that all of the patentee’s patents are invalid or not infringed. usercontent.com/external_content/untrusted_dlcp/www.google.com/en/ 22 Eric Stasik, Royalty Rates and Licensing Strategies for Essential Patents on us/press/motorola/pdf/sso-letter.pdf. LTE (4G) Telecommunication Standards , LES NOUVELLES 114 –19 (Sept. 43 U.S. Dep’t of Justice Statement, supra note 7. 2010), available at http://www.investorvillage.com/uploads/82827/files/ 44 In re Motorola Mobility, FTC File No. 121 -0120. LESI-Royalty-Rates.pdf. 45 See Rambus, Inc. (FTC Aug. 2, 2006) (Commission opinion) (emphasis 23 ETSI, ETSI IPR Online Database, http://webapp.etsi.org/IPR /. added), available at http://www.ftc.gov/os/adjpro/d9302/060802com - 24 For example, according to each firm’s 2010 Annual Report, Google invest - missionopinion.pdf. ed approximately $3.8 billion in R&D (12.8% of its sales), as compared with 46 See Statement of the Federal Trade Commission, In re Union Oil Co. of Cal. Apple’s R&D investment of $1.8 billion in 2010 (approximately 2.7% of (June 10, 2006), available at http://www.ftc.gov/os/adjpro/d9305/050610 sales). statement9305.pdf. 25 U.S. Design Patent 504,889. 47 Id. 26 U.S. Patent 8,046,721. 48 See Complaint, In re Motorola Mobility (Jan. 3, 2013), available at 27 See Chris Ziegler, Apple Asked Samsung to Pay as Much as $30 Per Android http://www.ftc.gov/os/caselist/1210120/130103googlemotorolacmpt. Phone, $40 Per Tablet for Patent Licenses , THE VERGE (Aug. 10, 2008), avail - pdf. able at http://www.theverge.com/2012/8/10/3234909/apple-samsung- 49 See Apple Inc. v. Motorola Inc., No. 11 -cv- 00178 (W.D. Wis. Oct. 29, 2012) patent-royalty-rates. Average price of a Samsung smartphone was approxi - (Opinion and Order) (“There is no language in either the ETSI or IEEE con - mately $360. See also Zach Epstein, Apple Sold More Smartphones in Two tracts suggesting that Motorola and the standards-setting organizations Quarters than Samsung Sold in Two Years in the U.S. , BGR (Aug. 10, 2012), intended or agreed to prohibit Motorola from seeking injunctive relief”). http://bgr.com/2012/08/10/samsung-smartphone-tablet-sales-us /. 50 Complaint, supra note 48. 28 Supra notes 15, 19. 51 29 As the concurring and dissenting statements filed in connection with the See, e.g. , Reuters, Microsoft Wants Samsung to Pay Smartphone License: Commission’s decision to accept a consent order make clear, there are sig - Report (July 6, 2011), available at http://www.reuters.com/article/2011/ nificant statutory and Noerr-Pennington issues in play. 07/06/us-samsung-microsoft-idUSTRE7651DB20110706; Horace Dediu, 52 Microsoft Has Received Five Times More Income from Android than from See Decision and Order, In re Motorola Mobility (Jan. 3, 2013), available at Windows Phone , ASYMCO (May 27, 2011), available at http://www.asymco. http://ftc.gov/os/caselist/1210120/130103googlemotorolado.pdf. com/2011/05/27/microsoft-has-received-five-times-more-income-from- 53 Id. android-than-fromwindows-phone /.

SUMMER 2013 · 29